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INTERNAL
ENVIRONMENT
ANALYSIS
Chapter 4
Assoc Prof. Dr. Lê Thái Phong
Faculty of Business Administration
Foreign Trade University
E: [email protected]
T: 0975.055.299
Learning objectives
1. Understanding resources + capability +
distinctive/core competencies
2. Value creation of firm
3. Value chain analysis
4. Key success factors (KSFs)
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External and Internal Analysis
Macroeconomics
Economic OP
Political & Legal PO
EXTER
N AL an RTU
dT
HR NITIE
Technology
Socio-cultural EAT S
THE Demographic S
MACRO-ENVIRONMENT
STRATEGIC GROUPS
INDUSTRY STAGE of DEVELOPMENT
5 FORCES MODEL (Plus 1)
EXTERNAL
THE •Rivalry
•Barriers to entry
INDUSTRY •Suppliers
•Buyers
•Substitutes
•Complementors
THE •COMPETITOR ANALYSIS
COMPANY
COMPANY STAGE of DEVELOPMENT
INTER
NAL RESOURCES, COMPABILITY, DISTINCITIVE
STRE COMPETENCIES, VALUE CREATION
NG
WEA THS and •Efficiency
KNES •Innovation
SES •Customer Responsiveness
•Quality
2-3
“Before leaders can set up a new
strategy, they must reach a
common understanding of the
current position of the company .”
- W. Chan Kim & Renee Mauborgne -
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Internal environment analysis
• The aim of the strategy is to generate better
business results (competitive advantage).
The purpose of internal analysis is to pinpoint the
strengths and weaknesses of the organization.
Strengths Weaknesses
Lead to superior performance. Lead to inferior performance
Internal environment analysis
• Internal analysis includes:
– Quality + quantity of resources + capabilities
– The method of construction of unique skills and
distinctive capacity of enterprises
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Competitive advantage
• Competitive advantage
Firm’s ability to gain profitability that is greater than the
average profitability of the industry.
• Sustainable Competitive advantage
– Ability to maintain profitability and good profit growth that
is higher than average level of the industry for many years.
The main objective of the strategy is to
achieve a sustainable competitive advantage
which is measured by better profit and profit
growth rate.
Strategy and competitive advantage
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Resources
• THE ASSETS THAT ORGANISATIONS HAVE OR
CAN CALL UPON (from partners or suppliers)
• Tangible (visible): • Intangible
assets that can be (invisible): assets
seen, touch, and that cannot be seen,
quantified touch, and
quantified
Types of Firm Resources
• Tangible resources are assets that are
relatively easy to identify:
– Physical assets: plant & facilities, location, machinery &
equipment
– Financial assets: cash & cash equivalents, borrowing capacity,
capacity to raise equity
– Technological resources: trade secrets, patents, copyrights,
trademarks, innovative production processes
– Organizational resources: effective planning processes &
control systems
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Types of Firm Resources
• Intangible resources are difficult for
competitors to account for or imitate – are
embedded in unique routines & practices:
– Human resources: trust, experience & capabilities of
employees; managerial skills & effectiveness of work teams
– Innovation resources: technical & scientific expertise &
ideas; innovation capabilities
– Reputation resources: brand names, reputation for fairness
with suppliers; reliability & product quality with customers
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Capability
• Ability/Skills at coordinating its resources
and putting them into productive use
• Coming from organisational’s routines, rules,
and procedures (internal processes)
• Product of its organisational structure,
processes, control, and hiring systems
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Types of Firm Resources
• Organizational capabilities are competencies or
skills that a firm uses to transform inputs into
outputs; the capacity to combine and use
tangible & intangible resources, e.g.:
– Outstanding customer service
– Excellent product development capabilities
– Superb innovation processes & flexibility in
manufacturing processes
– Ability to hire, motivate, & retain human capital
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Capability
• Usually based on the development of, transfer,
and exchange of information, and knowledge
through human resources in enterprises
• Capacity foundation is the knowledge and
unique skills of staff in companies =>
professional skills of labour
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Distinctive competencies
• Firm-specific strengths that allow to:
– Differentiate its products from others
– And/or achieve substantially lower costs than
rivals
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Resources, capability,
distinctive competencies
• (some) RESOURCES +
• (some) CAPABILITIES =
• DISTINCTIVE COMPETENCIES
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Resources, capability,
distinctive competencies
• YES: firm-specific valuable resources
• NO: capability
• NO: distinctive competencies
No need to possess massive
resources. So long as having
capability that no competitors
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Resources, capability,
distinctive competencies
• 1984-1988
– Sales: $1.66b - $3.75b
– Net profit: $98m - $570m
– Market value: $1.8b - $10.3b
• Resources + capabilities
– Film library
– Brand name
– Film making skills (animation)
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Resources, capability,
distinctive competencies
• Strategies:
– Releasing classical characters
– Making full length movies:
• Lion King
• Aladin
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Groupwork
• Analyse internal environments of the chosen
firm
– Resources
Strengths
– Capabilities
Weaknesses
– Distinctive competencies
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Resource-based theory (RBV)
• A firm’s unique resources and capabilities
provide the basis for a strategy
• Resources and/or capabilities:
– Valuable
– Rare
– Inimitable
– Nonsubstitutable
VRIN
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Value
• Strategic capabilities are of value when they
provide potential competitive advantage in a
market at a cost that allow an org to realise
acceptable levels of return
– Taking advantage of opportunities & neutralising
threats
– Value to customer and organisation
– Providing potential competitive advantages
– cost: low enough to have return
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Rarity
• Rare capabilities are those possessed uniquely
by one or by a few others
– E.g. Patented products that give firm advantages
– Library: rare collection of books
– Retail store: prime location
• Rare capabilities need to provide two things:
– Meeting customer needs
– Sustainability
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Inimitability
• Those that competitors find difficult to imitate
or obtain
• Two conditions:
– Superior performance
– Linked competencies
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VRIN model
V R I N Concequences Significance
N N N N Disadvantages Profitability below
average
Y N N Y/N Equal (competitors) Averaged profitability
Y Y N Y/N Short-tern competitve Above average
advantage
Y Y Y Y/N Sustainable competitve Far above advantage
advantage
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Resource-based theory (RBV)
• The firm is organised to exploit the resources
and capabilities
• INTERNAL focus
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Analysing the Environments
• Two Environments
• The External Environment (chapter 3)
• The Internal Environment (chapter 4)
• Successful strategy formulation requires the consideration of both
environments
• Why and How do we do this?
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External Analysis
Opportunities
and Threats
By studying the external environment, organisations
identify what they might choose to do.
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Internal Analysis
Unique resources,
capabilities, and
competencies
(required for sustainable
competitive advantage)
By studying the internal environment,
organisations identify what they can do
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The Industry Organisation (I/O) Model
of Above-Average Returns
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Industrial Organisation (I/0)
Model of Above-Average Returns
• Dominance of the External
Environment
• The industry in which an
organisation competes has a
stronger influence on the
organisation’s performance.
• A stronger influence than the
choices managers make inside
their organisations.
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I/O Model of
Above-Average Returns
The External Environment
Attractive Industry
Strategy Formulation
Assets and Skills
Strategy Implementation
Superior Returns
Superior Returns: earning above-
average returns
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Value creation for customers
• Company profitability depends on three
following basic factors
1. VALUE/UTILITY (customers get from
products)
2. Product PRICE
3. COST to make products
4. Consumer surplus is superior utility that
consumers gain exceeds the price they paid
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Value creation for customers
• Basic principle:
The higher the
utility, the more
pricing options
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Value creation for customers
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Value creation for customers
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Value creation for customers
Creation of superior value requires the gap
between the utility gained (U) and production
costs (C) is greater than the competitors.
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Value-Chain Analysis
• Value-chain analysis looks at the sequential
process of value-creating activities
– Value is the amount buyers are willing to pay for
what a firm provides
– How is value created within the organization?
– How is value created for other organizations in
the overall supply chain or distribution channel?
– The value received must exceed the costs of
production
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Value chain analysis
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Value-Chain Analysis
• Primary activities contribute to the physical
creation of the product or service; the sale &
transfer to the buyer; and service after the sale:
– Inbound logistics
– Operations
– Outbound logistics
– Marketing & sales
– Service
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Value-Chain Analysis
• Support activities either add value by
themselves or add value through important
relationships with both primary activities &
other support activities:
– Procurement
– Technology development
– Human resource management
– General administration
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Value chain analysis
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Example: The Value Chain in Service
Organizations
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KEY SUCCESS FACTORS
Basic Concept
• KEY SUCCESS FACTORS (KSFs) are FACTORS that an
organisation must have to compete successfully in an
industry
• A KEY SUCCESS FACTOR can be
– Specific skill or talent
– Competitive capability
– Something a firm must do to satisfy customers
• Can be industry level or firm level
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INDUSTRY KEY SUCCESS FACTORS
• KSFs consist of the 3 - 5 really major
determinants of competitive success in
industry
• Identifying KSFs is top priority as they are good
cornerstones of a firm’s strategy
– Winning COMPETITIVE ADVANTAGE often
hinges on being distinctively better than
rivals at one or more of the KSFs
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INDUSTRY KEY SUCCESS FACTORS
• Example: Restaurant
• 1. Quality of food
• 2. Quality of service
• 3. Ambience
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FIRM KEY SUCCESS FACTORS
• FACTORS that make a firm successful
• You can identify different factors make your
firm successful
• You can identify different factors make your
competitors successful
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Work with your team
• Draw the value chain activities of your firm
• Identify KEY SUCCESS FACTORS of the chosen
industry
• Identify your resources, capabilities, and
distinctive competencies
• Identify YOUR STRENGTHS AND WEAKNESS
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Results of internal analysis
STRENGTHS WEAKNESSES
S1 T1
S2 T2
S3 T3
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